The Road to Australian Housing Hell…

More evidence the Aussie economy is grinding to a halt: Yesterday, the Australian Bureau of Statistics released Australian housing finance and building approvals data. It wasn’t pretty.

Housing finance – the amount of credit provided to the residential housing sector, including refinancing – fell 1.3 per cent in the month of February. Finance provided to owner-occupiers fell a hefty 4 per cent while ‘investor’ finance increased 4.4 per cent. How anyone thinks housing is a good investment is beyond us…a speculation in the hope of rising prices maybe, but an investment?

Actually, the whole ‘housing is a great investment’ mindset is alive and well in Australia. Today’s Financial Review has a special lift-out on ‘Investing in Residential Property’. There are a couple of classic articles you sure won’t want to miss. For example:

‘For affordability, you can’t beat single bedders’ and…

‘In slow times, shop around and think strategically’

Timeless advice.

Anyway, our point is you don’t see these types of advertisements/special reports at the bottom of the market. They’re the type of thing that pops up after a much-loved asset class has a bad year. They tap into the emotion that now must be a good time to buy. Things are slow…it’s a buyer’s market. And if you can’t afford anything useful, you and the family can always get that cheap single bedder.

Owner-occupiers don’t seem to be buying the hype though. They’re the ones who seem to be doing the sums and working out that renting is actually a cheaper option…and that supposedly ‘dead’ rent money is, in many cases, less than the dead weight of interest on an exorbitant loan.

In such cases, the only way you can build equity in the asset is by betting on house price appreciation. That’s been a safe bet for decades…but is it for the next few? The law of nature, averages and mean reversion would cast doubt on such a bet.

Even more worrying for the Aussie economy was the sharp drop in February building approvals. Seasonally adjusted, total dwellings approved dropped 7.8 per cent month-on-month. Over the past year, approvals are down 15.2 per cent.

Predictably, the release of these dismal figures drew a cry for interest rate cuts…and fast. Today’s Fin Review quotes the Australian Chamber of Commerce and Industry as saying:

‘The time has come for Australia’s central bank to move decisively to cut rates by a full half a per cent, and for the retail banks to immediately pass it on. There needs to be a significant and unambiguous signal to support activity and lift confidence across the next quarter.’

And how has low and lower interest ratesworked out for the US, Japan, the UK or Europe? The simple fact is, when debt levels become extreme (household debt in Australia is over 100 per cent of GDP) lower interest rates reflect economic malaise, not strength. The evidence is everywhere to see.

We’ll come back to that point in a moment. First, let’s look at the much more likely reason why Australia is in a home building slump:

Taxes.

They are completely out of control. Over in the property section of the Fin Review, a report by the Centre for International Economics, commissioned by the Housing Industry Association, shows that taxes make up between 36 per cent and 44 per cent of the price of a new home. Seriously.

So there you go. House prices are not unaffordable because interest rates are too high. They are unaffordable because you have leeches at every level of government trying to get their share of blood from the homeowner.

The article cites an example of a young Sydney-based couple with a $612,000 house and a 10 per cent deposit. In such an example, the tax component of the purchase price would consume half their mortgage repayments.

The study points out that nearly all the burden of the taxes fall on the homebuyer. Land bankers, developers and builders only absorbed between 2 per cent and 6 per cent of the tax burden.

There are a few reasons why governments will likely do very little about this massive rort. Firstly, the property gravy train provides them with too much money. A separate report released yesterday revealed the property industry provided the Victorian State government $5.4 billion in taxes in 2009/10. That’s nearly 40 per cent of the State’s total tax revenue.

And if governments seriously attempted to reform the property tax system, you would see prices drop. Falling house prices and winning elections don’t usually mix.

The bottom line is that due to political greed and ineptitude (that includes Labor and Liberal governments at State and Federal level) our housing system is a total mess. And the whole property sector is complicit too. No one cared while easy credit pushed house prices higher, financing exorbitant fees and taxes. But now the industry is in a rut, the fee grabbers are getting testy.

Not that the finance industry is any different. The whole superannuation industry is filled with ticket clippers. But taxes, fees and commissions on super are not quite as exorbitant. And while super is important, we’re not talking about the essential service of shelter here.

So we have a major structural problem in house prices. And rather than do anything themselves, governments will call on the RBA and banks to lower interest rates to make houses ‘more affordable’.

Meanwhile, those who suffer from lower interest rates – savers or those relying on income to live – get screwed. We’re not at the stage of the US just yet, but we’re heading there. If you want to know the effect of prolonged low interest rates, just take a look across the vast Pacific Ocean.

John Hussman‘s latest essay provides the details. It’s as good a description you’ll read about why central banking is essentially evil. As the saying goes, ‘the road to hell is paved with good intentions’.

If you dig into the payroll data, the picture that emerges is breathtaking. Since the recession “ended” in June 2009, total non-farm payrolls in the U.S. have grown by 2.32 million jobs (establishment survey, or 2.03 million using Household survey figures). However, if we look at workers 55 years of age and over, we find that employment in that group has increased by 3.04 million jobs.

In contrast, employment among workers under age 55 has actually contracted by nearly one million jobs, regardless of which survey you use. Even over the past year, the vast majority of job creation has been in the 55-and-over group, while employment has been sluggish for all other workers, and has already turned down.

…while the civilian labor force participation rate has declined significantly for virtually every class of worker since mid-2009, the participation rate for workers over the age of 65 has hit new highs.

Beginning first with Alan Greenspan, and then with Ben Bernanke, the Fed has increasingly pursued policies of suppressing interest rates, even driving real interest rates to negative levels after inflation.

Combine this with the bursting of two Fed-enabled (if not Fed-induced) bubbles – one in stocks and one in housing, and the over-55 cohort has suffered an assault on its financial security: a difficult trifecta that includes the loss of interest income, the loss of portfolio value, and the loss of home equity. All of these have combined to provoke a delay in retirement plans and a need for these individuals to re-enter the labor force.

In short, what we’ve observed in the employment figures is not recovery, but desperation. Having starved savers of interest income, and having repeatedly subjected investors to Fed-induced financial bubbles that create volatility without durable returns, the Fed has successfully provoked job growth of the obligatory, low-wage variety.

Over the past year, the majority of this growth has been in the 55-and-over cohort, while growth has turned down among other workers. Meanwhile, broad labor force participation continues to fall as discouraged workers leave the labor force entirely, which is the primary reason the unemployment rate has declined. All of this reflects not health, but despair, and helps to explain why real disposable income has grown by only 0.3% over the past year.

Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Sound Money. Sound Investments, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market.
To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

Good article, but a slowdown in housing is not really an indication that the economy is grinding to a halt.

Certainly, it is going through a transition as consumers try to cut back on discretionary spend and pay down their enormous debt burden. The market can take care of itself if you let it, but you are correct that all those on the property gravy train have a bad case of economis interventus, and are clamoring for the RBA to back-stop their source of free money.

The question is, will Glen Stevens let the market self-correct, or will he do the political thing and pump liquidity back into the market (and by extension, the housing market)?

And saying Central Banking is essentially evil is just childish. Central Banking is essentially socialism. Banking is inherently unstable, and without a central bank, there would be a collapse of a major bank every few years. The Central Bank is essentially an insurer of banks, and any losses that exceed the premiums it collects are passed on to everyone i.e. they are socialised, so that some percentage of the population do not lose all of their savings when a bank becomes insolvent.

If you want to go back to the system of each bank issuing their own currency, then you need to be prepared for a lot of instability and social unrest, or fascism. I suspect that you would be quite happy with the latter, as it is a very appealing concept to conservatives, however, it’s not really all that enjoyable for most people, and fascist regimes tend to be pretty boring places to live.

And those taxes being met by 30 years term (but variable rate) private borrowing. From this fractional banking injects liquidity into the economy absorbed and regurgitated and GST taxed and releveraged and reboosted by midddle class welfare into debt service capacity by the services industry (for as long as the ponzi and balance of payments charade is accepted by the rest of the world’s surplus economy investors and American liquidity carry traders living off zero rate treasury largess.

Line one – “the Aussie economy is grinding to a halt” – and so, a lack of new housing starts is to blame.

Given that houses run on a price to wages multiple of about 9, then its not surprising many folk are backing off on this investment class, however to assume the multiple is too high, and lower interest rates will help the supply side, is flawed .. indeed badly. The simple fact is Australians are building 15000 new homes a year, yet 40000 is really the number needed. Thus the high prices, and no amount of interest rate cutting will change the situation much. Adding to this scarcity, since Wayne Swan dropped the foreign buyers barriers three years ago the price of housing has soared – To wit, do check out price rises since the GFC.

Nowadays no real estate agent worth his salt wouldn’t be without an office in China, consequently since early 2009 all of Australia’s top end real estate(and other stuff) had been put on the blocks, where an inrush of foreign buyers has snapped a huge number of top end properties – thus forcing Australians to buy in the suburbs next door, which in turn has had a cascading effect on pretty well all suburban real estate in our big cities. A top down effect.. directly attibutable to loose government policy which exposes Australians to what the world will pay for our real estate here.

Granted the author has a point …. ” they are unaffordable because you have leeches at every level of government trying to get their share of blood from the homeowner “. However do have a close look at the cascading effect of the “Top down model”. Apart from Australians now being in direct competition for their own real estate, one needs to look at, say, NSW, where land cannot be released for new housing because of decades of zero spending on infrastructure which has to go with housing. Rotten politicians again, yet few commentators seem to be able get to the core of the NSW illness – though other states have it too. Albeit, not quite so bad.

The essence of the problem, is too many punters are vying for the same assets – untrammeled migration, along with foreign buyers rushing in have caught state governments out, and there will be no end to it until until someone rings a half-time bell.

Also, comparisons with the US are a worthless pastime. There they have too many houses because of a loose money system, where an unemployed layabout with zero savings could have had all the money he wanted for a new house. The result, a surfeit of houses where flipping them for a fast buck is no longer a game plan. Yet for some reason commentators dwell on these so-called value comparisons

What is desperately needed in Australia is some investigative reporting on the “big picture” – not the piddling effects of an RBA interest rate cut, etc. Results will find we have a “country management” problem. Dunderheads at the wheel, who at best think/act within their short terms of office

It’s getting desperate for the Housing Ponzi folk when companies are offering Australian citizenship at real estate trade shows in China for those willing to buy aussie housing. Scrapping the bottom of the ‘greater fool’ barrel.

High prices are considered desirable by pollies and that is why we have them at 9 times income. They support the idea of wages catching up which is why so many jobs are getting wiped. BHP even closed a coal mine!

Garry….the housing sector is a big part of the Australian economy. It is first in terms of GDP in Victoria and is high up there in other states. State and Territory governments are highly dependent on taxes related to housing activity. When it collapse some more State revenues will be in trouble.

Australia has three economies….the mining sector that benefits a few. The housing sector that will unravel an finally the productive part of the economy and what is left of manufacturing.